Bank conundrum on California IOUs

July 7, 2009 | By Jim Kim

Bank of America, Citigroup, Wells Fargo and JPMorgan Chase were among the banks that committed to accepting state IOUs as payment. That was seen as a boon to California's attempt to slog through a crippling budgetary crisis. But now the banks say they will stop honoring the IOUs on Friday. The banks may take some PR heat for this, but can you blame them? All this is being done on the fly, and you would have to be concerned about a lack of oversight and anti-fraud measures.

The Business Insider suggests that this is sending a powerful message to the state: "Stop printing IOUs and get your budget problems solved, and we're going to create havoc by destabilizing your currency." That said, smaller California banks are stepping into the fray, betting on their government's ability to somehow get the ship in order.

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